Long-Term Care Policy Design

In the previous chapter we learned why personal savings and assets, Medicare, and Medicaid are for most people not good ways to fund long-term care:

• Savings and assets — Because of the high cost, it is not realistic for most Americans to save the amount needed to pay for long-term care while also buying a home, saving for children’s education, and funding retirement.
• Medicare and Medigap — Benefits for both nursing home care and home care are provided only for a short time to those needing skilled care to recover from an acute illness or injury. Medicare does not cover ongoing personal or supervisory care needed to cope with a chronic impairment.
• Medicaid — Those who are not indigent must generally deplete their life savings before qualifying. Care options are often limited for Medicaid beneficiaries.

But there is another approach: long-term care insurance (LTCI). A person can buy an LTCI policy, pay premiums of a set amount, and when she needs care, she will receive benefits to help cover the cost.

All LTCI policies work in essentially the same way and have many of the same provisions. But there is also a great deal of variation, resulting from different product designs and optional features. This section examines policy design — the different types of LTCI products consumers may choose from and how they differ. Key policy design questions include:

• Is the policy federally tax-qualified?
• Does the policy qualify for a state long-term care partnership program?
• What conditions must be met for benefits to be paid?
• What long-term care settings and services does the policy cover?
• On what basis are benefits paid?
• What rights does the policyholder have regarding renewal and premium increases?

HIPAA established a class of LTCI policies: federally tax-qualified (TQ) policies. To be tax-qualified, a policy must meet certain requirements, and owners of TQ policies enjoy certain tax advantages. There are two categories of LTCI policies:

• Federally tax-qualified (TQ) policies — approximately 90 percent of the total
• Nonqualified (NQ) policies

To be eligible to participate in a state’s long-term care partnership program, a policy must meet certain requirements — most importantly, it must be federally tax-qualified. The requirements of partnership programs are covered in depth in Chapter 4.

To receive benefits under an LTCI policy, an insured must meet at least one of certain conditions stipulated in the policy, known as benefit triggers. There are two common types:

• Physical (or functional) impairment — the insured’s physical condition prevents her from performing a specified number of activities of daily living.
• Cognitive impairment — the insured suffers from a serious cognitive condition such that close supervision is necessary to protect her health and safety.

For a policy to be tax-qualified under HIPAA, it must meet certain requirements in relation to benefit triggers:

HIPAA establishes six standard ADLs (bathing, dressing, toileting, transferring, continence, and eating) and precisely defines them. Tax-qualified policies must include at least five of these six and must use the HIPAA definitions. They must define a physical impairment as the inability to perform at least two of the standard ADLs without substantial assistance from another person.

A TQ policy may define substantial assistance in two ways:

• Hands-on assistance — the physical assistance of another person without which the impaired individual would be unable to perform the ADL.
• Stand-by assistance — the presence of another person within arm’s reach, necessary to prevent injury while the individual performs the ADL.

A TQ policy may require hands-on assistance, or it may accept stand-by assistance, or both — but it may not use a standard less rigorous than stand-by assistance.

A licensed healthcare practitioner must certify that the insured’s inability to perform ADLs is expected to last at least 90 days. This provision ensures LTCI benefits are not used for short-term recovery. There is no such requirement for cognitive impairment, as such impairments are not usually temporary.

To qualify for benefits on a cognitive basis, the insured must suffer a severe cognitive impairment such that substantial supervision is needed to protect her from threats to her health and safety. HIPAA defines this as a loss of or deterioration in intellectual capacity comparable to Alzheimer’s disease and similar forms of irreversible dementia, measurable by clinical evidence and standardized tests.

“Medical necessity” (a physician determining that a person needs long-term care) is no longer considered an appropriate trigger and may not be a benefit trigger of a TQ policy.

While benefit triggers have become largely standardized, some variation remains. Nonqualified policies may use other criteria such as medical necessity. Among TQ policies, some include all six ADLs while others include only five. Some require inability to perform two ADLs, others require three. Some require hands-on assistance; others accept stand-by assistance. In most policies, benefit triggers for home care are the same as for nursing home coverage, but a few use different triggers for each.

Even if benefit triggers are met, an LTCI policy does not pay benefits if the need for long-term care results from an excluded cause. Common exclusions include:

• Alcohol and drug abuse
• Illnesses or conditions resulting from participation in a felony
• Attempted suicide
• War or service in the armed forces
• Aviation (if the insured is not a fare-paying passenger)
• Mental or nervous disorders (except cognitive disorders of an organic nature, such as Alzheimer’s disease) — this exclusion has become less common and is not permitted in several states

Some policies limit benefits for preexisting conditions — medical conditions for which treatment was received or recommended within a certain period (normally six months or less) before the policy was purchased. It is becoming much less common for insurers to exclude preexisting conditions in individual LTCI policies; instead they simply require disclosure and underwrite accordingly. In group insurance, preexisting condition exclusions are still used.

Policies also generally exclude services for which no charges were incurred. For example, if Medicare or another government program covers a service and the insured pays nothing, she cannot receive benefits for that service.

In terms of covered long-term care settings, there are three main types of LTCI policies:

• Comprehensive policies — cover both nursing home care and home healthcare. Most also pay benefits for care in assisted living residences and other residential settings and for a variety of home-based and community-based services such as adult day centers. This is the most common policy type.
• Facility-only policies — pay benefits only for care in a nursing home, or only for care in a nursing home or other facility.
• Home care-only policies — a few insurers offer policies covering only home healthcare or only home care and community-based care.

An LTCI policy may provide benefits for the following additional services:

• Homemaker services and transportation — help with household chores and transportation to medical appointments and shopping.
• Informal caregiving — some policies pay a benefit when a family member provides care, or pay for caregiver training.
• Respite care — paid services for a short period so that a family caregiver can take a break. Typically covers 14 to 30 days per calendar year.
• Bed reservation — pays the facility to hold the insured’s bed or room during a hospital stay or other absence. Usually limited to 20 to 50 days per year.
• Care coordinator — a specially trained nurse or social worker who works on behalf of the insured to ensure she receives the best care and gets the most from her policy benefits.

Some policies also pay for home modifications, durable medical equipment (such as wheelchairs), and medical alert systems. Many policies include an alternate plan of care provision (also called an alternative care benefit or emerging trends benefit), under which the insurer may pay for goods and services not specifically covered by the policy — such as bathroom alterations, handrails, or ramps to keep a person safely at home. This provision requires agreement among the insured, her physician, and the insurance company.

LTCI policies normally have a set dollar amount of benefit per day, month, or (less commonly) week. There are three models for how the daily or monthly benefit is paid:

Advantages of indemnity and disability models:

• Easy to understand — the insured knows exactly how much he will receive for each qualifying day.
• Greater flexibility — the insured can use benefit dollars any way he wishes, including paying family caregivers, making home improvements, or meeting household expenses.
• Less documentation required for claims.

Advantages of reimbursement model:

• Less expensive than comparable indemnity and disability policies.
• Benefits are entirely tax-free; indemnity/disability benefits above a certain amount may be taxable.
• Benefits last longer, because unspent amounts remain in the policy’s lifetime maximum pool.

Many policies (especially newer ones) pay a monthly benefit instead of a daily benefit; some pay a weekly benefit. A monthly or weekly benefit allows for greater flexibility in meeting expenses since costs can vary significantly from day to day.

Each benefit model has administrative implications for insurers:

• Under the reimbursement model, the insurer must review bills and receipts and calculate the payable amount for each claim — a more labor-intensive process.
• Under the indemnity model, the insurer need only confirm that a covered service was provided (typically, that the insured remained a nursing home patient). No bills or receipts are required.
• Under the disability model, the insurer need only verify that the insured continues to meet a benefit trigger. No documentation of services is required at all.

The streamlined claims process of the indemnity and disability models reduces administrative costs, which can counterbalance some (but not all) of the savings insurers realize from salvage in reimbursement policies.

However, the disability model creates a greater potential for fraud. Under a reimbursement policy, an insured has little incentive to file a false claim — she can only receive what she can document spending on care. Under a disability policy, by contrast, an insured receives benefit dollars she can spend any way she wishes, and because no service documentation is required, it can be difficult for the insurer to verify that she continues to meet a benefit trigger. Insurers offering disability policies may therefore need to arrange for more frequent reassessments of the insured’s condition.

By law, all LTCI policies must be either guaranteed renewable or noncancellable.

The insurer must renew the policy year after year as long as the insured pays premiums — regardless of age, health, claim history, or any other reason. An insurer may increase premiums only when it makes the same increase on all policies of a certain class in a state, and only with the approval of the state insurance department (generally only when claims experience has been worse than projected).

Like a guaranteed renewable policy, a noncancellable policy cannot be terminated unless the insured stops paying premiums. Unlike guaranteed renewable, the premium can never be increased under any circumstances. Because of this inflexibility, insurers must charge higher premiums. Noncancellable LTCI policies are rare and disappearing.

A person suffering from a physical or cognitive impairment may neglect to pay premiums and unintentionally let her policy lapse. Two provisions prevent this:

• Impairment reinstatement provision — if an insured who has let her policy lapse can show she had an impairment at the time, the insurer will reinstate the policy without requiring medical underwriting. Reinstatement must be requested and premium paid within a specified time (typically five months) after the lapse notice.
• Third-party notification of lapse — the insured designates another person (such as an adult child) to whom the insurer must send a copy of any lapse notice. The insured must be notified every two years of her right to change the designated person.

Under a waiver of premium provision, the insured does not have to pay premiums while receiving benefits for nursing home care or assisted living, and for many policies, also while receiving home healthcare benefits. Some policies begin the waiver as soon as the insured has satisfied the elimination period; others require additional time after the elimination period ends.

The National Association of Insurance Commissioners (NAIC) has developed the Long-Term Care Insurance Model Act and the Long-Term Care Insurance Model Regulation, adopted in whole or in part by most states. Key requirements include:

• Certain terms (such as “home healthcare services,” “personal care,” and “skilled nursing care”) may be used only if defined as specified by the NAIC.
• Eligibility for benefits cannot depend on the insured having been previously hospitalized or having received a higher level of care.
• Only certain exclusions are allowed.
• If one policy replaces another, preexisting condition exclusions must be waived to the extent already satisfied under the prior policy.
• A policy must offer an inflation protection option.
• A policy covering nursing home care cannot limit coverage to skilled care only — all levels of care must be covered.
• The only allowable renewal provisions are guaranteed renewable and noncancellable.
• A policy must have a third-party notification of lapse provision.
• A policy must offer a nonforfeiture option.
• A policy must have an incontestability clause limiting the insurer’s right to contest based on application misrepresentations.

Although the NAIC models have created some degree of standardization, many differences remain because states have adopted different versions or only portions, and some states have enacted additional requirements.